Aware Inc/mass has a market cap of $87.5 million; its shares were traded at around $4.09 with a P/E ratio of 32.7 and P/S ratio of 3.6.

Highlight of Business Operations:

2011 compared to 2010. There was a significant improvement in operating income and net income in 2011 compared to 2010. Operating income increased from a loss of $333,000 in 2010 to income of $2.5 million in 2011; and net income increased from $180,000 in 2010 to $2.6 million in 2011. Higher earnings in 2011 were primarily a result of the following factors: i) growth of our services business; ii) a greater proportion of software revenue versus hardware revenue in product sales during 2011; iii) lower legal fees related to patents and patent monetization activities; and iv) lower director and officer compensation expenses.

2010 compared to 2009. There was also a significant improvement in operating income in 2010 compared to 2009, although net income declined. Net income for the year ended December 31, 2009 included a $6.2 million gain on the sale of assets, which was the primary reason for our profitability in 2009. However, operating losses were reduced from a loss of $5.5 million in 2009 to a loss of $333,000 in 2010. The $5.1 million improvement was primarily attributable to: i) the cessation of operating losses from our DSL Silicon IP product line as a result of the sale to Lantiq in 2009, and ii) improved profitability in our DSL service assurance product line. These factors were partially offset by increased legal fees related to patents and patent monetization activities.

The $3.7 million increase in revenue from the sale of DSL service assurance products was mainly attributable to: 1) a $1.2 million increase in software revenue as a result of the sale of our LDP software to two European telephone companies; and 2) a $2.5 million increase in hardware revenue, which was driven by: i) sales to an OEM customer selling handheld test devices into large telephone companies, and ii) the introduction of new products. The $0.2 million decrease in revenue from the sale of biometrics software was primarily due to fewer larger-sized sales to individual customers in 2010 as compared to the prior year.

Cost of services increased 149% from $0.7 million in 2010 to $1.8 million in 2011. As a percentage of services revenue, cost of services increased from 36% in 2010 to 41% in 2011, which resulted in gross margins on service revenue decreasing from 64% to 59%. The $1.1 million increase in cost of services was primarily due to a $2.3 million increase in service revenue. The decrease in gross margins on service revenue was due to a greater proportion of services provided to government customers that have slightly lower margins than commercial customers in 2011 as compared to 2010.

Research and development expense decreased 11% from $8.1 million in 2010 to $7.2 million in 2011. As a percentage of total revenue, research and development expense decreased from 34% in 2010 to 30% in 2011. The $0.9 million decrease in research and development expense was primarily due to how we deployed our engineering resources in 2011 and 2010. In 2011, our total engineering costs were $9.0 million, of which we classified $7.2 million to research and development cost and $1.8 million to cost of services based on the time spent on each activity. In 2010, our total engineering costs were $8.8 million, of which we classified $8.1 million to research and development cost and $0.7 million to cost of services. The reduction of research and development expense in 2011 was primarily due to a greater deployment of engineering resources on customer services projects in the current year as compared to the previous year.

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